Right Diagram Brief description: Firms will employ labour as long as it is profitable. They will therefore employ up to the point where the marginal revenue product of labour is equal to its marginal cost.
Detailed description: The diagram shows the marginal revenue product curve which decreases eventually due to diminishing returns. The firm will employ factors up to the point where the marginal cost equals the marginal revenue product. Equilibrium occurs at this point because if the firm employed any more labour, the amount that the labour added to revenue would be less than they cost.
Left Diagram
Brief description: In a perfectly competitive labour market, firms will produce up to the point where the marginal cost of labour is equal to the marginal revenue product.
Detailed description: It will be profitable for firms to keep employing labour as long as the revenue the labour generates (the marginal revenue product) is greater than the cost of that labour (the marginal cost). They will therefore keep employing up to the point where the MRP is equal to the marginal cost (supply).
